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Loan Modification Vs Refinance
With a loan modification, your lender or servicer changes the terms of your loan with the goal of preventing default and foreclosure. While you can also change the terms of your loan by refinancing, in a refinance situation, you can shop around with multiple lenders for a new loan, and its typically not done to avoid going into foreclosure, but rather to save you money or take cash out.
What Types Of Loan Modification Programs Exist
If nothing else, the Great Recession and mortgage crisis made lenders and mortgage-servicing companies more attuned to the needs of at-risk homeowners.
Nowadays, most lenders have programs designed to see borrowers through tough times while keeping them in their homes. If your lender doesnt, ask them or a Housing and Urban Development approved counselor about your eligibility for programs that can assist you through the modification process.
HAMP the Home Affordable Modification Program expired at the end of 2016. Its successor is the Flex Modification program, overseen by Fannie Mae and Freddie Mac. Borrowers whose mortgages are subject to Fannie or Freddie may qualify.
HARP the Home Affordable Refinance Program helped refinance underwater homeowners into new, more affordable mortgages. HARP expired at the end of 2018. Now there are Fannie Maes High Loan-to-Value Refinance Option and, from Freddie Mac, the Enhanced Relief Refinance program.
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Types Of Loan Modifications
There are two kinds of loan modifications typically offered, according to Charles Gallagher, an attorney and partner at St. Petersburg, Florida-based Gallagher & Associates Law Firm, P.A., which represented several clients in foreclosure who recently sued Caliber Home Loans over its loan modification practices.
Its essential to understand the terms of a loan modification, including what your new payments are going to be, if the changes are temporary or permanent and what the long-term implications are as far as overall loan cost, Sharga says.
Foreclosure And Its Alternatives Will Cause Your Credit Scores To Dropthe Amount Depends On Your Credit History And Other Factors
Updated by Amy Loftsgordon, Attorney
If you’re struggling to make your mortgage payments, seriously behind in them, or already facing foreclosure, you might be wondering about the impact of a foreclosure or foreclosure alternatives on your credit. The truth is, whether you file for bankruptcy, let your home go through foreclosure, complete a short sale, or even work out a loan modification with the bank, your credit scores will probably suffer.
But will one of these options impact your more than another? Foreclosures, short sales, and bankruptcy are all bad for your credit. Bankruptcy is the worst of the bunch. A loan modification might not be so bad, depending on how the lender reports the modification to the .
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Forbearance Process: Student Loans
For most federally held student loans, at the start of the pandemic payments and interest were automatically suspended through at least September 30, 2020. That deadline has since been pushed back and continues to update as the Covid-19 pandemic progresses. You can refer to the U.S. Department of Education for up to date information about Coronavirus and loan forbearance by visiting studentaid.gov.
However, some student loans do not qualify for this benefit, including loans under the Federal Family Education Loan Program, private student loans that are owned by commercial lenders and some Perkins Loans that are held by the institution you attended. To request a forbearance agreement or delayed payments on these loans, contact your loan servicer.
Shop For Loan Modification Programs
Visit the U.S. Department of Housing and Urban Development online at HUD.gov and search for “avoiding foreclosure.” When the search results load, click the top link, which will take you to a site that gives you information about programs that can help you with a loan modification.
This site also offers a free downloadable brochure, published in English, Spanish, Chinese and Vietnamese. The brochure offers mortgage loan modification tips that let you know what to expect from your lender as well as red flags that indicate mortgage scams.
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Trial Modifications Listed As Current
The government has recently issued new guidance to lenders stating that any trial modifications are listed as current on a modified schedule. While this could still hurt your score, its likely to be a small short-term change and certainly less impactful than missing payments or refinancing your mortgage. If your lender isnt listing your changes as current, a loan modification attorney could help.
How Does A Loan Modification Affect Your Credit Score
By | Submitted On July 01, 2010
A loan modification is the process whereby a lender modifies the terms of an existing mortgage. It can be modified by reducing the existing interest rate, extending the length of the loan, a principal reduction, or a combination of all of these. Any of these modifications affects a homeowner’s credit score in different ways, even if the homeowner is not already late on his mortgage payments.
Any method of modification on a loan without a principal reduction is only a Band-Aid for the existing problem of the homeowner needing financial relief from a burdensome mortgage payment and these reductions are usually temporary for 3 – 5 years and then back to a higher interest rate to make up for the lost interest to the lender. In the meantime the homeowner’s credit can be affected from as little as 50 to as much as 200 points.
A principal reduction in a loan modification makes the monthly payment much more affordable but introduces a new element to the equation, which is a write off of debt for the lender. Some lenders will ask the homeowner to sign an additional note for the reduced balance, or simply write off the reduced amount and give the homeowner an IRS Form 1099 Misc. Income at year end. In this case the homeowner’s credit score is affected by a point reduction of 50 to 100 points for just this principal reduction and not including late payment point reductions and more point reductions for the actual loan modification.
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Check Your Credit Score
Check your current credit score through MyFico.com or by using a free source such as AnnualCreditReport.com or CreditKarma.com. If it’s above 720, you are in good standing. If it’s below 700, almost any change will hurt you. See if you have been charged for any late payments on your mortgage or other bills late payments affect your rating the most, lowering your score substantially.
How Can I Apply For A Loan Modification
Homeowners who are facing financial hardship that makes it impossible to fulfill the mortgage contract should get in touch with their lender or servicer immediately, as they might be eligible for a loan modification.
Typically, lenders will ask you to complete a loss mitigation form. Because foreclosures are so costly for investors, a loss mitigation form helps them look at alternatives, such as loan modifications, to figure out what makes the most financial sense.
Be prepared to submit a hardship statement mortgage and property information recent bank statements and tax returns profit and loss statements and a financial worksheet that demonstrates how much youre earning versus spending.
If your loan modification application is denied, usually, you have the right to appeal it. Because rules vary by lender, find out when the appeal deadline is. Next, youll want to get precise information on why your loan was denied, as this will help you prepare a better case in your appeals.
There are many reasons why you might not qualify, from not providing sufficient proof of hardship to having a high debt-to-income ratio . A high DTI means that you have a lot of debt relative to your income, which might signal that you cant afford your mortgage, even at a modified amount.
Working with a housing counselor or attorney who specializes in mortgage modifications can improve your chances of getting approved for a loan modification.
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May Be Reported As A Debt Settlement
Lenders will often report a loan modification to credit bureaus as a type of settlement or adjustment to the terms of the loan. If it shows up as not fulfilling the original terms of your loan, that can have a negative effect on your credit. But the effect will be less and of shorter duration than a string of missed payments or a foreclosure would have.
On the other hand, some lenders may not report a change as a settlement, meaning your credit would be unaffected. In this case, your credit rating could even improve, because your monthly payment would be reported as decreased. When negotiating a loan modification, ask your lender how they report it – they may even agree not to report it as an adjustment, particularly if you’ve been a good customer over the years.
One particular credit problem has been associated with trial loan modifications under the government’s Making Home Affordable Program. In a trial modification, the homeowner is given a reduced payment schedule which, if maintained for three months, can be made permanent. However, some homeowners are reporting that their lenders are reporting them as failing to stay current on their payments during this period, since the reduced payment schedule is not yet official.
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How A Foreclosure Bankruptcy Or Short Sale Affects Your Credit Scores
A foreclosure or short sale, as well as a deed in lieu of foreclosure, are all pretty similar when it comes to impacting your credit. They’re all bad. But bankruptcy is worse.
Going through a foreclosure tends to lower your scores by at least 100 points or so. How much your scores will fall will depend to a large degree on your scores before the foreclosure. If you’re one of the few people who had higher credit scores before foreclosure, you’ll lose more points than someone with low credit scores. For instance, according to FICO, someone with a credit score of 680 before foreclosure will lose 85 to 105 points, but someone with a credit score of 780 before foreclosure will lose 140 to 160 points. According to experts, late payments cause a huge dip in your credit scores, which means a subsequent foreclosure will not matter as much .
If you’re one of the rare homeowners who haven’t missed a payment before doing, say, a short sale, that event will cause more damage to your credit. And if you avoid owing a deficiency with a short sale, your credit scores might not take as big of a hit. But, overall, there isn’t a huge difference between foreclosure and a short sale when it comes to how much your scores will drop.
How Is A Mortgage Modification Different From Refinancing
While modifications and most refinancing agreements share a goal of lowering your monthly payments, the two programs are very different. Refinancing is the process of securing a new mortgage. Youll need to apply, qualify and close on a new mortgage loan, and you may choose to refinance with a new lender. Alternatively, a mortgage modification adjusts the mortgage agreement that’s already in place with your current lender.
If youre experiencing financial difficulties, refinancing may not be an option since you may not qualify for a new loan with the changes in your financial circumstances. A modification doesnt require the same kind of application and approval as a refinance. That means it could be a better option if you have less-than-perfect credit or your income has decreased.
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What Is Loan Modification
Loan modification is when a lender agrees to alter the terms of a homeowners mortgage to help them avoid default and keep their house during times of financial hardship.
The goal of a mortgage loan modification is to reduce the borrowers payments so they can afford their loan monthtomonth. This is typically done by lowering the mortgage rate or extending the loans repayment term.
A mortgage loan modification does not replace your existing home loan or your lender, explains Karen Condor, a finance and insurance expert with Loans.org.
However, it restructures your loan in the interest of making it more manageable when you experience difficulties in making your mortgage payments.
How Do Loan Modifications Affect Your Credit
The impact that a mortgage modification has on your credit could be minimal if your lender doesnt classify the change as a type of settlement when reporting it to credit bureaus. You might even see your increase slightly because your monthly housing costs are going down, but thats not very common.
You should probably prepare for the more likely scenario in which your lender does report your loan modification as a settlement or adjustment. In that case, you would almost certainly see a negative impact on your credit.
Heres the thing, though: Whatever dip in credit score you experience as a result of a loan modification will likely be only temporary. As you get a handle on your mortgage payments and settle into spending habits that fit your income level, your credit situation should sort itself out.
Also, any hit to your credit as a result of a loan modification will pale in comparison to the fallout from defaulting on your mortgage. If you have to pick one of those two options, the choice is crystal clear.
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How Do You Qualify For A Mortgage Modification
If and we stress if your lender allows loan modifications, it will be in cases where homeowners are struggling to keep up with monthly mortgage payments. Often, that financial difficulty is the result of forces outside of your control.
Every lender will have their own conditions for accepting a loan modification. For instance, Freddie Mac requires borrowers to be at least 60 days behind on mortgage payments to qualify for its Flex Modification program. But there are some common scenarios where borrowers can apply for one.
Common Reasons For Selling After A Loan Modification
Regardless of the reasons for selling after a loan modification, a loan modification doesnât mean you have to stay in your house forever if you donât want to.
Some people find they are still struggling after a loan modification and want to get out from underneath their mortgage before they get behind again to avoid a foreclosure or a short sale.
Others might want to take advantage of the equity they have and get a smaller house.
Then again, reasons for selling after a loan modification could have nothing to do with finances. Just because folks have had rough patches in the past doesnât mean theyâre still experiencing financial hardship.
Some people sell their homes because their children have grown up and they no longer need so much house. Or their job may require that they relocate. There could have been a divorce. Or they just might want to move and try something new.
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What Is A Mortgage Modification
Many homeowners seek mortgage modifications because they struggle to make their mortgage payments. Modifying a mortgage may be available if a homeowner can show that he or she can afford a reduced payment. The modification may take the form of permanent interest rate reductions, more time to pay off the mortgage , principal forbearance , convert a variable interest rate to a fixed interest rate, capitalizing the loan , and, in some cases, principal reduction.